Investment Vehicles

A customer invests $100,000 in an Equity Indexed Annuity contract tied to the Standard and Poor's 500 Index. The contract has a 90% participation rate; a 15% cap and a 3% floor. Interest is credited to the contract under the annual reset method using the simple interest method. The performance of the Standard and Poor's Index over the next 3 years is: Year 1: +20% Year 2 : -5% Year 3: +10% At the end of year 3, the customer will have a principal balance of: approximately:

127,000 The first year increase in the index of 20% with a 90% participation means that 18% would be credited to the account - however, because of the 15% cap, this is the first year credit of $15,000. ($100,000 principal x .15) Under the simple interest method, the second year interest credit is still based on the $100,000 principal amount (there is no "interest on interest" as is the case with compound interest) and because of the 3% floor, the credit will be $3,000. ($100,000 principal x .03). Under the simple interest method, the third year interest credit is still based on the $100,000 principal amount (there is no "interest on interest"as is the case with compound interest) and because of the 90% participation, 90% of the 10% index increase, or 9% will be credited. The credit will be $9,000. ($100,000 principal x .09). Thus, the principal value after year 3 will be $100,000 + $15,000 + $3,000 + $9,000 = $127,000.

A customer sells short 100 shares of ABC stock at 40 and buys 1 ABC Mar 40 Call @ 5. The maximum potential loss is: $500 $3,500 $4,500 unlimited

500

When comparing an ETN to a structured product, which statement is TRUE? ETNs can be traded at any time while structured products cannot ETNs offer current income while structured products do not ETN income is taxable at higher rates than income from structured products ETNs are equity securities that are exchange listed

A ETNs can be traded at any time while structured products cannot An ETN is an Exchange Traded Note. It is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. They are not an equity security - they are a debt instrument. ETNs are listed on an exchange and trade, so they have minimal liquidity risk. In comparison, a regular structured product is non-negotiable and, if redeemed prior to maturity, imposes an early-redemption penalty. ETNs make no interest or dividend payments. Their value grows as they are held based on the growth of the benchmark index, with any gain at sale or redemption currently taxed at capital gains rates. Thus, they are tax-advantaged as compared to other structured debt products.

A customer sells short 3000 shares of XYZ stock at $23 per share. The stock subsequently declines in price to $20 per share, and the customer believes that there may be a temporary change in market direction. If the customer is not concerned about the cost of hedging, he would be best advised to: buy / sell calls / puts

A buy 30 "at the money" calls The best answer is A. This customer has a gain on a short stock position that he wishes to protect from a subsequent market rise. The only way to do this is either to buy a call or sell a put. If a call is purchased with a strike price at the current market price, then the customer can exercise the call in a rising market and buy the stock at that fixed price, closing out the short position at a profit. However, it costs money to buy a call - but since the customer is not concerned about the cost of the hedge, this is not an issue. Since this customer is short 3000 shares and each call contract covers 100 shares of stock, 30 contracts are needed to hedge.

If a customer purchases in a 200% leveraged ETF, the customer can lose: the investment amount more than the investment amount two times the investment amount an unlimited amount

A the investment amount

Hedge funds are set up as: management companies limited partnerships general partnerships unit investment trusts

B limited partnerships

As the economy fluctuates, the holder of a fixed annuity contract should know that: payments will fluctuate based upon the actual return that the separate account earns payments will not fluctuate over time during periods of negative economic growth, annuity payments are subject to reduction during periods of negative economic growth, it is likely that annuity payments will increase

B payments will not fluctuate over time

An exchange traded debt security is a(n): ETF ETN ADR CMO

ETN

The Assumed Interest Rate (AIR) associated with variable annuities is the: rate at which the annuity payments are scheduled to increase each year interest rate paid to the annuitant estimated future earnings rate needed to maintain level payments to the annuitant average of past and assumed future rates of return earned by the annuity

C estimated future earnings rate needed to maintain level payments to the annuitant

A 62-year old man owns a non-qualified variable annuity contract. He makes a withdrawal. The amount of the withdrawal is: not taxable potentially subject to taxation at capital gains rates potentially subject to taxation at ordinary income tax rates not taxable if used to pay for specified medical expenses

C potentially subject to taxation at ordinary income tax rates The best answer is C. Distributions from variable annuity contracts that take place after age 59½ are taxable at ordinary income tax rates. These distributions are 100% taxable and represent all of the tax-deferred earnings that have been reinvested and grown over the years. Once these are depleted, the original investment in the contract is returned with no tax due (since there was no deduction for the contribution amount, these are already "after-tax" dollars.)

Covered call writing is an appropriate strategy in a: declining market rising market stable market fluctuating market

C stable market

A grandfather wishes to provide a perpetuity for his 2 grandchildren. He wants to give them the amount of $1,000 a month. How much principal is required assuming that it is invested at a 3% rate of return?

D $400,000 A perpetuity is a "perpetual payment" - so it is an annuity that goes on forever. If $400,000 is invested at 3%, it gives annual income of 3% of $400,000 = $12,000 without eating into the principal amount. $12,000 annual income / 12 months = $1,000 month income. The best way to deal with this type of question is to take 3% of the principal amount given in each choice to get the annual income and divide it by 12 months a year.

Which of the following are reasons to trade options? I Hedging II Tax Benefits III Speculation IV Liquidity

I Hedging III Speculation

During the annuity period of a fixed annuity, the insurance company assumes which of the following risks? I Mortality II Morbidity III Expense IV Investment

I Mortality III Expense IV Investment

Which statements are TRUE regarding Equity Indexed Annuities (EIAs)? I In a year of sharply rising stock prices, EIAs will match the positive return of the Standard & Poor's 500 Index II In a year of sharply rising stock prices, EIAs will not match the positive return of the Standard & Poor's 500 Index III In a year of sharply falling stock prices, EIAs will match the negative return of the Standard & Poor's 500 Index IV In a year of sharply falling stock prices, EIAs will not match the negative return of the Standard & Poor's 500 Index

II In a year of sharply rising stock prices, EIAs will not match the positive return of the Standard & Poor's 500 Index IV In a year of sharply falling stock prices, EIAs will not match the negative return of the Standard & Poor's 500 Index

The holder of a put on a listed stock exercises. The holder MUST: I deliver stock II deliver cash III take delivery of stock IV take delivery of cash

I deliver stock IV take delivery of cash

Premiums paid for a fixed annuity contract are invested: I in the insurance company's general account II in the insurance company's separate account III primarily in growth equities IV primarily in fixed income securities

I in the insurance company's general account IV primarily in fixed income securities

Which of the following statements concerning a universal life insurance policy are TRUE? I The policy owner has a choice of investments for the cash value II The policy owner can change the amounts of premium payments III The policy owner can change the amount of the death benefit IV The policy owner receives a guaranteed, fixed rate of return on cash value

II The policy owner can change the amounts of premium payments III The policy owner can change the amount of the death benefit

Exchange Traded Funds (ETFs) are: I registered under the Investment Company Act of 1940 as closed-end management companies II registered under the Investment Company Act of 1940 as open-end management companies III regulated by the SEC and FINRA IV regulated by FDIC and the Department of Treasury

II registered under the Investment Company Act of 1940 as open-end management companies III regulated by the SEC and FINRA

Which statement about variable annuity contracts is FALSE? Annuity payments continue for the life of the purchaser A variable annuity contract is defined as a "security" Investment risk is borne by the issuer of the contract Annuity payments are affected by market fluctuations

Investment risk is borne by the issuer of the contract Variable annuity contracts do not promise a fixed monthly payment to the purchaser of the annuity. The performance of the underlying investments that fund the annuity determine the monthly amount to be paid. If the investments perform poorly, this will reduce the monthly annuity payment. Thus, investment risk is borne by the purchaser of the annuity and not by the insurance company that issues the contract - which is why it is defined as a "security" under Federal law. Also note that because insurance companies are regulated separately by each State, their products, including variable annuities, are also subject to State insurance regulation. Finally, as with any annuity, payments will continue for the life of the annuitant.

Which of the following is MOST likely to fluctuate for an annuitant during the payout period of a fixed annuity? Death benefit Benefit payments Investment return Purchasing power

Purchasing power TWith a fixed annuity, the investment return and benefit payments are guaranteed and fixed. During the payout period, there is no death benefit - the insurance company simply promises to make the fixed monthly payments until the annuitant dies. (Note that there can be a death benefit offered while the purchaser is making payments into the contract.) Because the benefit payments are fixed once the annuity payments start, the purchasing power of those fixed payments will fluctuate depending on the rate of inflation.

All of the following are risks of investing in a Real Estate Limited Partnership (RELP) EXCEPT: Business risk Liquidity risk Regulatory risk Reinvestment risk

Reinvestment risk Limited partnerships are illiquid - they do not trade and a limited partner can only sell his or her unit with general partner approval. So liquidity risk is a major issue. Because these are tax shelters that use provisions of the tax code to reduce tax liability, owners of limited partnerships face increased risk of tax audit; and also are subject to regulatory risk, which is the risk of tax law change. There are no dividends or interest payments received that must be reinvested, so there is no reinvestment risk. However, business risk is another big issue here - because the business venture may fail.

Which statement is TRUE about forming a limited partnership? All partners be limited partners There must be at least 1 general partner and 1 limited partner More than 50% of the partners must be limited partners No more than 99 partners can be limited partners

There must be at least 1general partner and 1 limited partner A limited partnership consists of at least one General Partner and one Limited Partner. There can be multiples of each. The General Partner is the manager of the venture and assumes unlimited liability. The Limited Partner is the passive investor whose liability is limited to his investment.

A customer owns 10,000 shares of ABC stock purchased at $40. The stock moves up to $50 and the customer buys 100 ABC Jan 50 Puts @ $3. What is the maximum gain potential? $70,000 $100,000 $130,000 Unlimited

Unlimited The purchase of the puts protects the gain on the stock. If the price were to fall below $50, the customer could exercise the puts, selling the stock at $50, reaping a $10 per share gain, net of the $3 premium paid per share for the puts = $7 net profit x 10,000 shares = $70,000. However, this is not what the question is asking. If the stock price continues to rise, the customer simply lets the puts expire worthless, and holds the stock as the market rises. Then the gain potential is unlimited. Reviewing

Insurance companies may invest premiums into their general accounts for all of the following types of life insurance policies EXCEPT: Universal life Variable universal life Whole life Term life

Variable universal life Variable contracts (either variable life or variable universal life) have the premiums deposited to a separate account. The performance of the separate account determines the ultimate death benefit, so the policyholder bears the investment risk. Flexible premium variable life is another name for variable universal life, which gives policyholders the right to skip a premium payment. Term life, whole life, and universal life premiums are deposited to the insurance company's general account. The death benefit is fixed based upon premium contribution and is not subject to investment risk. The insurance company invests the premiums collected through its general account and bears the investment risk.

Which type of insurance provides a guaranteed cash value? Term insurance Variable life insurance Whole life insurance Variable universal life

Whole life insurance The best answer is C. The insurance company guarantees the cash value for a whole life policy and includes this guaranteed amount in a schedule in the policy. Term insurance has no cash value. The cash value of variable and variable universal life depends upon the results of the separate account investments, which are not guaranteed.

Premiums deposited to purchase a variable annuity contract are invested by the insurance company in: the general account a separate account an investment account an annuity account

a separate account

A put option is "out the money" when the: current market value of the stock is less than the option contract strike price strike price of the option contract is below the current market value of the stock option contract premium exceeds the option contract time value option contract time premium is less than the option contract premium

strike price of the option contract is below the current market value of the stock